To Bin or not to Bin

By pondering the imminent future, we can be certain that, whichever way you look at it, the Cypriot banking industry will never be the same again.

Undoubtedly, shareholders and depositors of both Laiki Bank and Bank of Cyprus have been adversely effected and, to the more pessimistic among us, a basic tenet of the social contract in our market capitalist society – that workers can trust banks to safely guard their finances – has been breached and the banks’ plight has absorbed the national economy into a spiral.

Since 15th March 2013, the future of Cyprus has been rewritten to include a sufficient amount of time to restructure the current financial model: a model that seems to have been proven to be unfitting for the Cypriot economy; one of the highest interest rates on deposits in the world, foreign money looking for safety in the Eurozone flooded in, perhaps too quickly, and the region’s third smallest economy, with an annual GDP of €18 billion, accumulated bank deposits to the value of €70 billion.

The result was an anemic economy that, in the early hours of the 25th of March 2013, transformed our rights from being protected by our government to being conditional or subject to change at the pleasure of our European administrators, making Cyprus the fifth Eurozone economy to seek funds from the EU after Greece, Ireland, Spain and Portugal.

To the people of Cyprus, who have contributed to each of the other four EU member states’ bailouts there is a sense of abandonment. We are hoping that we are not just part of a political game plan to cash in on the present status quo. Some would say that Cyprus has paid a higher cost than most politically because of ulterior motives that could include:

• Concentration on how to win the next election rather than how to avoid the next crisis;
• The unwillingness of Germany to pay for the debts of a country which ‘in their eyes’ is seen as a ‘money laundering’ jurisdiction for the Russians;
• An EU division between the relatively wealthy north and the poorest south;
• The capture of the benefits to be received as a result of future exploitation of natural gas and oil in the fields of the territory of Cyprus;
• The key to the Cypriot solution with the Turkish Cypriots; or even
• Driving Cyprus out of the Eurozone.

The fact is that in October 2011, whilst the EU was struggling to deal with a debt crisis in Greece, a ‘time bomb’ was planted that would blow a large €5 billion hole in the Cypriot banking system with a chain reaction of unintended and severe consequences which have surfaced in the last few weeks.

The more positive among us consider that the global providers of products and services to the energy industry are proceeding with their investments in anticipation of further development of oil and natural gas resources in Cyprus. This could be a big boost to our financial future.

Despite all the pros and cons discussed above, Cyprus has always been, and still remains, the foremost business hub for investments. Even though we now have an increased corporate tax rate (which will be formalised in the following weeks, and which is expected to fluctuate in the rate of about 12.5%), the traditional features that have made Cyprus such an attractive structuring destination remain effectively unchanged. The features to instill confidence in investors include:

• Cyprus remains in the European Union and the Eurozone;
• Cyprus still maintains a clear fiscal framework. With 44 double taxation treaties in place, companies enjoy a full participation exemption on capital gains and dividend income and there is no withholding tax on dividends, interests and royalties for non-Cyprus residents;
• Cyprus has an enviable position in world trade by being within the crossroads of three continents; and
• Cyprus holds one of the highest positions in the quality and amount of scientific management training in Europe.

The fact that Cyprus has received financial support from international lenders with a €10 billion bailout deal, it clearly indicates that by taking the appropriate measures there is confidence in her ability to stabilise the banking system and achieve economic recovery. Furthermore, Troika has verified that the levy on deposits with Bank of Cyprus will be a one-time occurrence and deposit holders with Bank of Cyprus will be recompensed by being given shares in Bank of Cyprus.

The €10 billion Euro question is whether Cyprus will be able to carry out the terms of the conditions set by Troika. If she fails, extra measures could be imposed and there is a chance that Cyprus could be excluded from the Memorandum by the end of 2016, ending progressivism as we know it. The trust of citizens in the European project as a whole are at stake here so it is up to us to pull together and show that it can be done. If we do not take every step to restore this trust, we risk witnessing the disintegration of the Eurozone and the European Union as we know it.

Understandably, at the moment fear and uncertainty pervade the atmosphere in Cyprus but the restructuring of our two largest banks will not only create a stable and strong well-sized and sustainable banking sector but will also give rise to opportunities for more potential investors. With the exploitation of the oil and gas fields in the next few years it is inevitable that Cyprus will become a much stronger economy and, once again, an important financial centre.

To bin or not to bin? I choose NOT TO BIN. We are no different from every other country that has faced challenging times ahead and there is absolutely no reason not to reach that light at the end of the tunnel. As the great Winston Churchill once said, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”.

I am a Cypriot and I am proud to say that I am an optimist, it is in our interests for everybody to be!

By Michael J. Hadjihannas, Partner with FinExpertiza Cyprus

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